Friday, June 1, 2012

Greece could begin again

Default and exit from the eurozone?
Greece is heading for an exit from the euro, and the rest of the eurozone periphery may follow, precipitating a huge change in the EU. After the crisis, Greece could slowly recover
by Costas Lapavitsas
Greece is approaching the climax of its crisis, and its choices will influence the course of Europe for years. Although Greece represents only 2% of the European Union’s GDP, the impact of those choices will be wide.
The Greek crisis is fundamentally the result of its membership of the eurozone. Greece is paying the price for a belief in the ancient fallacy that possessing “hard” money puts a weak economy on a par with the strong. In reality, “hard” money is more likely to destroy a weak economy, a lesson about to be re-learned in Portugal, Ireland and Spain. Greece is heading for an exit from the euro and the rest of the eurozone periphery is likely to follow, with severe implications for the monetary union. Coping with an exit will require the reintroduction of economic controls, a major retreat from the neoliberal, pro-market approach to economic policy.
The Economic and Monetary Union (EMU) is often presented as a political step in the integration of Europe, a demonstration of solidarity among Europeans. The reality is quite different. The euro is an international reserve currency that can compete against the dollar and serve, first and foremost, the interests of big banks and enterprises in Europe. It is a peculiar form of money, created from nothing by a hierarchical alliance of independent states.
There are two fundamental problems with the construction of the euro, reflecting its peculiar make-up and leading to its failure. The first is the contradiction between monetary and fiscal policy. The monetary space of the EMU is homogeneous, and the European Central Bank (ECB) allows banks to borrow against the same interest rate benchmarks. But the fiscal space of the EMU is heterogeneous, and each state ultimately exercises sovereignty in collecting taxes and spending. The union has attempted to deal with the problem by imposing fiscal discipline via the Stability and Growth Pact, or the much harsher Fiscal Compact. But national sovereignty over fiscal matters has not been abolished.
The second problem is a much less noticed but equally severe contradiction: the monetary space of the EMU is homogeneous but its banking space is heterogeneous. There is no such thing as a “European” bank, only French, German, Spanish and other banks. Even though banks can obtain liquidity from the ECB in the “European” space, they are obliged to turn to their own state when their solvency is in doubt. Banks operate with transnational money, but they are ultimately national.
At the root of both problems lies the absence of a unitary or federal European state. Europe remains a continent of nations overlaid with an economic structure that pretends nations do not matter. Yet nation states have remained integral to the EMU. This reality is fundamental to the eurozone crisis and makes its resolution very hard.

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